SOCGEN: The Syria Conflict Could Spill Over Into Iraq, And Brent Oil Could Surge To $150

Wednesday

Aug 28, 2013 at 7:00 PM

Joe Weisenthal

Oil has been rising lately, as the prospects for some kind of strike in Syria seem like almost a sure thing.

But why does Syria really matter to oil?

Michael Wittner at SocGen has produced a special 3-page note for clients on the matter of what a strike would mean for the oil market.

He notes that Syria itself is not a real player in the oil market, so that's not the issue.

The concern is "spillover." And he's got his eye on Iraq, where violence is getting worse, and where the fighting in Syria has a parallel.

Wittner writes:

Our big worry is Iraq. The Sunni vs. Shiite conflict in Syria has a direct parallel in Iraq, and the violence in Iraq has reached levels not seen since 2008. For oil, the northern pipeline carrying Kirkuk grade to Ceyhan, Turkey in the Med has been repeatedly attacked for the last 2-3 months, reducing exports from 350 kb/d to under 200 kb/d (on average). Our concern is that the oil-directed attacks move south and potentially disrupt the 2 Mb/d of Basrah grade exported through the Basrah port complex on the Persian Gulf. There are signs that the non-oil violence (bombings, etc) may be moving south, and oil-directed attacks may follow. Iran, who is Syria’s only state ally in the region (Hezbollah and Russia are Syria’s other allies), may choose to stir up such attacks, in order to hurt the economies of the Western countries by causing an oil price spike.

Base case scenario: $125 for Brent We believe that in the coming days, Brent could gain another $5-10, surging to $120-$125, either in anticipation of the attack or in reaction to the headlines that an attack had started. In our base case, we assume an attack begins in the next week. If it takes longer, and there are no signals that an attack is imminent, the oil price uplift from the entire Syrian situation will start to fade. Our base case scenario does not include any actual supply disruptions resulting from the US-led attack on Syria.

Upside scenario: $150 for Brent If the regional spill over results in a significant supply disruption in Iraq or elsewhere (from 0.5 – 2.0 Mb/d), Brent could spike briefly to $150.